$100 a square foot in Manhattan? Is that true, and, if so, is that the new market?

A couple of years ago, while trying to explain that my little local market was cheap, I told a friend that a large office building, 100% leased to a single credit tenant, and on a very good corner if redevelopment was necessary, sold for $100 a square foot. By contrast, I was just involved in a deal with a local medical office building costing and worth twice that.

CPN is reporting:

With rumors circulating of a sale price around $100 per square foot, the sale of the 66-story American International Group headquarters in Lower Manhattan likely set the bar for the biggest sale in the area market thus far in 2009.

Youngwoo & Associates (YWA), a New York-based investment and development firm, together with Kumho Investment Bank (Kumho), entered into an agreement to acquire the AIG building, 70 Pine Street (pictured), and an adjacent office building, 72 Wall Street. The two buildings will total 1.4 million rentable square feet in the heart of Manhattan's Financial District.

Okay. Let's assume the rumors are true. Now, this asset will require significant, if not complete re-leasing, which depresses the value since your income is, well, zero. I do not know the lower Manhattan market well anymore. But $100/sf? That's fire sale pricing in my humble opinion. Does it make a market? Beats me.

Another claim in the story is actually more interesting to me; namely, that there is a little thawing in the credit markets, especially in deals involving less than $100 million of $50 million. (I have always called these deals my sweet spot. I never liked big portfolio transactions and avoided them like the plague back in the day.) You mortgage guys out there would have to tell me about that and whether it is true.

UPDATE: Let's go to the other coast, where the WSJ is reporting the sale of a new office building in Irvine, California owned by Maguire Properties at a 40% discount to construction costs.

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Office buildings - is it really this bad?

The New York Times has a gloomy piece today on the cycle of layoffs to subleases to vacancies to building owners not being able to pay the mortgages, thus leading to a potential "ticking time bomb." According to the story,

Many commercial property owners will face a dilemma similar to that of today’s homeowners who cannot easily get mortgage relief because their loans were sliced and sold to many different parties. There often is not a single entity with whom to negotiate, because investors have different interests.

By many accounts, building owners have been caught off guard by how quickly the market has deteriorated in recent weeks.

Rising vacancy rates were expected in Orange County, Calif., a center of the subprime mortgage crisis, and New York, where the now shrinking financial industry dominates office space. But vacancies are also suddenly climbing in Houston and Dallas, which had been shielded from the economic downturn until recently by skyrocketing oil prices and expanding energy businesses. In Chicago, brokers say demand has dried up just as new office towers are nearing completion.

I would think a lot of it is lease dependent. Are there termination options? Are bankruptcies playing a role as tenants reject leases? I was always under the impression that, generally speaking, things were not overbuilt, although I was concerned about so much space in Chicago coming on line. Even some tenants are backing out of commitments at new buildings here. Frankly, I never thought I would see New York vacancies approach 10%.

And the fact that many buildings are in CMBS pools makes it all the harder to do workouts. It makes me want to look at one of my deal toys: a bottle of Pepto-Bismol with a plaque that says, "Remind Me Again Why We're Doing a Conduit Loan Elixir."

All in all, this is a great time to be a tenant, the best in a while. And some say this is the perfect time to buy, especially if there is any government help. The trick will be to wait and see whether any stimulus will create jobs and the need for offices. One interesting thing is the speculation that President-Elect Obama wants to create 600,000 new government jobs. If that is the case, there will be a lot of need for government leases and the guaranteed, AAA-rated cash that come with them. Smart landlords may want to start gearing up now. GSA leasing is very tricky.

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One other Lehman thought is this

This will put a HUGE hole in the Manhattan real estate market. Some months ago I mentioned that the time might be ripe to lease in Manhattan, but that the one thing that could really make things bad would be if there was trouble with the investment banks. And apparently there's already a lot of sublease space available.

Well, those days have come. If Lehman shuts its doors, that could bring another 2.2 million sf of space into the open market, some of which is owned and some of which is leased. Its Midtown HQ could fetch a billion in the open market, and predictions are that space could be 20-30% cheaper as a result of all this turmoil. How much coin are we talking?

Landlords would also sorely miss Lehman. In addition to owning its 1 million-square-foot headquarters on Seventh Avenue, the firm rents 2.4 million square feet at pricey New York addresses, including 399 Park Ave. and 1271 Sixth Ave. Lehman paid $250 million dollars in rent worldwide last year—a good slug of that amount going to Manhattan building owners. And it has committed to another $1.4 billion in leases over the next four years.

In other words, a lot. Those of you in BigLaw who read me may be thinking about your jobs, as the cuts already abounded. But in a way that seems silly since there will be so much work to be done, as well.

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Law firms know this is the time to lease

Well, in Manhattan, at least. Above the Law (citing the New York Observer) reports that a number of law firms are on the prowl for large offices in Manhattan. Does this mean rents are coming down in price? Don't know. But especially with bankers cutting back it can be a good time to jump into the market if you need space, and I think law firms are trying to take advantage of it. Landlords like large leases. I did write about this, at least respecting subleases, in Law Firm Inc. a few months ago. Without getting into it, one major issue for law firms is avoiding recourse back to the partners if the firm tanks.

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But will they make the portions larger?

I don't think that's humanly possible, and it might even be actionable. What am I talking about? Buca, Inc., known for its family-style Buca di Beppo restaurants, has been acquired by Planet Hollywood. The chain had been struggling with losses, caused in part by financial mismanagement that ended up seeing some of its execs go to jail.

(Courtesy of Traffic Court.)

Buca has some good dirt locations, and I assume PH will keep the chain running. But you never know when something ends up becoming a dirt play; e.g., Vornado's takeover of Virgin -- Michigan Avenue's gone and now the Times Square outlet will close, allowing rents to go up from $54 a foot to some $700! That's a nice jump.

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Cadwalader layoffs

Apparently another 96 lawyers are being let go at Cadwalader today, meaning the total loss count this year is, if I can count, in excess of 130 people.

CWT is well known as one the major, major players in the CMBS market. I've worked with all three of their US offices (NY, DC and Charlotte), usually on the same deal. For whatever reason, CWT had this thing about running deals from multiple offices when I was borrower's counsel.

While I found the CWT people professional and thorough almost to a fault, my clients were sometimes unhappy, especially when the lender's counsel's bill (which the borrower pays) came out. We used to try to predict the amount as a little game. At least one client, as I recall, was so irked that it resolved to ask their lenders in the future to find other, more cost-effective firms to run the deals. And in the climate that was a few years back the lenders usually complied, moving the legal work to other firms -- sometimes outside New York -- where the lawyering was still excellent but the overhead was much lower.

Now, that didn't hurt CWT at the time because they were so crazy busy that it hardly mattered. And they got more than their share of the very best deals, which is befitting a top firm of smart lawyers. But now that the capital markets practice is at a virtual standstill there's nothing for this army of lawyers to do. And CWT makes no bones about its desire to be aggressively profitable.

“It’s exactly the shark tank that everybody says it is,” said former partner Robert Vitale, “If you’re a shark, it’s great.”

Layoffs are painful, but, at a shop like this, probably inevitable. You know what you sign up for here. And almost 100 lawyers are about to be much less comfortable than they were yesterday.

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Real Estate Rudy?

Previously I lambasted Eliot Spitzer for wanting to start a vulture fund. Now, it's Rudy Giuliani's turn.

Am I going to bash Rudy? No. why not? Well, he's not a disgraced ex-governor, he's not Client #9, he's a decent guy from what I can tell, he was brilliant after 9/11 and, last but not least, he appears to be doing this right.

This is party of his diversification plan. And that's smart. He also has a VERY experienced partner in Berman Partners. Finally, by setting a high initial investment but a low threshold for his first fund, he's going to invest in smart plays and also have a limited number of investors to keep happy.

So...well played, Rudy. I hope you make a mint.

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They weren't kidding about buying

A couple of months ago we noted that Shorenstein Properties was now a buyer. And they meant it. Yesterday the WSJ reported that Shorenstein is buying two of the properties DB took back from Harry Macklowe, and at a 20-30% discount from Macklowe's price. The story also reports that Paramount is buying a third building, presumably at the same discount.

Does this mean other buildings are going to tank similarly? Probably not. Most analysts were saying that Macklowe overpaid for his chunk of the old Zell/EOP empire, and the credit market agreed by not bailing Macklowe out when his loans came a-callin'. We need more empirical evidence -- meaning more deals -- before the real correction can be ascertained. The smart money has been on 15%, and I'm not inclined to disagree.

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Sam sure doesn't pull punches

Sam Zell calls the estimated difference between the $6 billion Harry Macklowe paid for the EOP Manhattan properties and the $7 billion he paid for them "Macklowe stupidity.'' Ow. You must have a thick skin to play at that level.

While people do not want to overpay:

The pace of commercial real estate deals may pick up as U.S. pension funds such as the California Public Employees' Retirement System move money into real estate, Zell said. "I don't think they can afford to sit on the sidelines and get 2 percent from Treasuries when they need 7 percent'' of returns to pay retirement benefits, he said of the funds. That could lead to an "opening'' in credit markets.

Makes sense to me, but we have to see what the rest of the dirt world says and does.

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Bear's Manhattan space? Well, since you asked....

Jeff Brown wondered what would happen to Bear's dirt ion the wake of its collapse. Looks like we know what happens in Manhattan, and it's not a shocker. The Deal Junkie, citing Bloomberg, says that Bear's "best in the world" space will be occupied by JPMorgan Chase's investment bank. So, the IB guys win again. Go figure. And if tis deal goes down, what a great space for the money.

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Negative $1 billion?

That's what Kevin Kingston is telling us that Bear Stearns is actually worth when you take into account that its Manhattan HQ is probably worth about $1.2-1.3 billion alone. (But will it be still without an anchor tenant?)

As I write, it looks like the Fed's intervention over the weekend has helped, what with the market down only ~30 points as I type. (That can of course change in a flash.)

What does this mean for dirt? Well, the loss of thousands of jobs will mean more open space on the market, just what I feared previously, as JPMorgan Chase will just absorb the accounts. But it does not mean a total collapse. Bear rolled the dice and it came up 2, 3 and 12. The people on the don't pass line win. And could this mean a return to tangibles? Maybe. We know commodities are rising rapidly. But dirt? It is more affected by fundamentals. It does smack of more opportunity in the market this year for those waiting -- and with the wherewithal -- to pounce.

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Wall Street woes and dirt

A few months ago I suggested that law firms lock in leases in busy markets such as New York because, even with the credit crunch, rents were still going up. I had one exception to that advice: big layoffs on Wall Street.

And now that is being predicted by today's Journal. And the numbers are not the prettiest.

It may be that the big boys hold on to some empty space if there is a bloodbath, under the expectation that they will need it again soon. But another likely scenario is that the firms, wanting to eat as little real estate cost as possible, might flood the market with cheap(er) sublease space for subtenants. Of course there are a lot of factors coming into play here (improvements and allowances, the lengths of the deals, landlords that may or may not cooperate), but it could bring some pricing into play in what has been a very friendly landlord market.

There's not going to be a rent collapse in my opinion. Heck, there may not even be much of a decline if any. But any lowering of Manhattan rents may be seen by the naysayers as more evidence of sky falling and all that, so be forewarned.

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